/ZB 30-Year Bond Pairs Trade Idea

B

Bobby T

Hello,

I'm fairly new to futures trading and I wanted to get a 2nd opinion on one of my trade ideas.

I noticed in the 30-year /ZB contracts that the June 2015 contract is trading significantly more expensive than the previously expiring contract (March 2015). To gain a basis of comparison, I looked at other bond futures products (/ZT, /ZF, /ZN, and /UB) and the December, March, and June contracts for these other products are in a state of backwardation and are all closely priced.

Would it be a good pairs trade to sell /ZB June's contract and buy March's? Is there a reason June's contract is so much more expensive than March?

Thanks,
Bobby
 
The good news is you were observant enough to spot this anomaly.

Bad news is that there is nothing here to take advantage of. The CME changed the composition of the CTD basket for the June contract (reasons having to do with the fact that there was a gap in 30Y Bond issuance from 2001-2006 which finally "caught up" to the futures), which leads to the big price difference you are seeing. If you go to the CME website there are press releases where they talk about what they did in detail.
 
Bobby, these are physically delivered products - in other words, the exchange itself has a mechanism for participants to make or take delivery of the underlying upon expiry of the futures contract. If you chart a continuous contract for the CBOT interest rate products, every once in a while you will see a large price differential associated with the months March, June, Sept, and Dec. This is because the Cheapest-to-Deliver physical bond ( the underlying ) has changed and the futures price reflects the different valuation for the new on-the-run bond. From a notional standpoint, interest rates are much bigger markets than the equities, and very seldom will you see such a liquid instrument priced incorrectly.
 
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